7 Common Questions about Debt

Mary, I want to move to another city and my credit rating is bad. How can I help my credit rating? I have one year to do this.

First, get a copy of your credit report. The look at every negative thing. Anything that you do not know to be true, dispute. Start paying everything on time. Write up a brief explanation for everything that is negative but that you can explain. You can submit 100 words to be included with your file. The most important thing is that you get intimately familiar with your credit report. It can be scary to face it, but don't let that keep you from moving forward. I think Experian is the easiest report to read.

Should I pay down a bigger deposit on a new house, or smaller so I can pay off credit card debt?

Pay the plastic! Get rid of all unsecured debt. That's what will sink your ship. You can always prepay your mortgage once your credit card debts are history.

I have heard that it's important to have at least enough money in your savings account to cover three months' expenses. However, I have credit card debts of almost $5,000 at an average interest rate of 19 percent. Which should I do first: concentrate on building my savings, or paying off my credit cards, or some combination of the two?

You need to have an emergency account, especially if you are in debt. So even if you are in debt, you need to be saving at least three months' worth of living expenses. Otherwise you'll just keep running to the credit cards every time anything unexpected comes along. Even if you make only the minimum payment, do that so you can start saving.

I have $8,000 in credit card debt and am considering taking out a home equity loan to pay off my credit cards. Would you consider this wise?

No, don't do it. Why? Because you will put your home at risk for foreclosure. As it is now, if you get behind because something happens, the worst they can do is go after your credit rating and harass you on the phone every night, but if you transfer it to your home and you get behind ... bam! They'll take your home. I suggest you not transfer the unsecured debt to your home. The rule of thumb: Never use an appreciating asset (home mortgage) to pay for depreciating goods and services (stuff on your cards). Better: Buckle down and slash your expenses, liquidate your assets (sell everything you don't need or use) and pay down those credit card debts quickly. Now your home equity can grow undisturbed. It is probably the only appreciating asset you will ever have. Guard it.

My husband and I are trying to become debt-free and are beginning by paying off credits cards. Is the best way to embark on this to pay extra money on a card at a time until all are paid off and closed, or should we get a signature loan and consolidate?

Well, if you can get a signature loan (that means it is not tied to your home equity) for less interest than what you are paying on the cards (good luck, that's difficult if not impossible), go for it. But that would be difficult these days. I suggest you get your game face on, get committed, get a plan and start pedaling for all you're worth. You won't believe how quickly you can pay off debt if you are so committed you can almost taste it.

Do you think it is safe to use a mortgage company that is not a local bank just to get a lower interest rate? We have a very high mortgage with a 7 percent interest rate and would like to lower our payments, but I'm a little afraid of using one.

If you can find a mortgage company in Timbuktu that will lend you money at a lower interest rate than what you have, why not? They're the ones taking the risk, not you. After all, you will get the money up front. I wouldn't be fearful of that. Just watch those fees! They could soak you big time. Eyes open, all the time. By the way, 7 percent interest on a mortgage is not high.

Is it true that these harassing creditors, including medical bills, cannot do anything as long as you make an attempt to regularly make payments to them even if they are small?

Well, not exactly. They can force you into bankruptcy by suing you. But they usually don't for smaller bills. Their only weapon is harassment. They can make your life pretty miserable, though. Just don't transfer those bills to your home's equity, or you'll lose it through foreclosure. Try to negotiate with them.

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